We are downgrading our Euro Area GDP growth forecasts for 2014 and 2015

Ruben Segura-Cayuela, Chief European Periphery Economist at Bank of America Merrill Lynch - Viernes, 18 de Julio

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We are downgrading our Euro Area GDP growth forecasts for 2014 and 2015 by 0.1ppt each, to 1.0% and 1.5%. This reflects slightly worse than expected hard data in Q2, and not a change of view on the trend. We think that most of the potential surprise in Q2 comes from net exports and investment. We believe that temporary factors are probably to blame:

 

1.       Investment likely expanded by 1.7% yoy, less than the 2.1% we initially expected, reflecting a larger payback than we anticipated from the mild winter in Q1 and its impact on construction.

2.       Exports have been lacklustre, not only in Q2, but throughout the first half of the year, owing to weaker than expected growth elsewhere and a combination of one-offs. Risks going forward are also clearly biased to the downside. But given our expectations for the global economy (and absent any major geopolitical shock) we would expect a progressive improvement in export behaviour during H2.

So, same themes, we are just marking to market Q2. Without forceful action from the ECB (and more importantly, without a nominal anchor) or a softer aggregate fiscal stance we fail to see any trigger for a material trend improvement.

Country details: Germany to 1.8% and 1.9% from 1.9% and 2.1%; France to 0.5% and 1.3% (versus 0.7% and 1.4% before); We cut Italy this year to 0.3%, from 0.5%. In Spain, we expect QoQ GDP growth to peak in Q2 at 0.5% but upgrade 2015 to 1.8% (from 1.5) on the back of fiscal stimulus (at the expense of worse fiscal numbers).

 

In the UK, another exceptionally strong gain in employment (equivalent to US payrolls of 400k) pulled the unemployment rate down to 6.5%, continuing the rapid declines in recent months. However, wage growth remained low at <1%. That paradox may soon lead BoE members’ views to diverge somewhat on how much weight to give to leading vs lagging indicators. In that context though, we expect the minutes from the BoE’s July meeting - published next week - to show another unanimous vote to leave rates and QE on hold. We also expect the preliminary estimate of Q2 GDP next week to show another robust 0.8% gain.

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Europe Economic Weekly

Looking through the noise

The weekly view: Tight policy mix = weak recovery 

In the context of tight monetary and fiscal policy, the outlook remains fragile. We argue that the moderately increasing growth trend will deliver volatile growth. 

Euro area: Downgrading GDP 

We are downgrading our Euro Area GDP growth forecasts for 2014 and 2015 by 0.1ppt each, to 1.0% and 1.5%. This reflects slightly worse than expected hard data in Q2, and not a change of view on the trend. 

UK: The labour market paradox continues 

With unemployment declining rapidly but wage growth remaining soft, views within the BoE may soon start to diverge on how much weight to give to leading vs lagging indicators. 

Peripheral watch: Portugal back to positive? 

The Portuguese economy looks set for a return to positive growth. We expect 0.2% QoQ in Q2, while we forecast that the economy will expand, on average, by 1% in 2014 and 1.5% in 2015. 

The week ahead: 

Next week, we expect the German IFO business climate to improve slightly. Euro area PMIs numbers for July should to be stable over the month, with the composite PMI at 52.8 

Date	GMT	Country		Data/Event		For	BofAML		Cons.†	Previous
22-Jul	09:30	UK		PSNB ex Royal Mail, APF		Jun	10.5bn		--	13.3bn
22-Jul	10:00	Euro area		Government Debt		Q1			--	--
23-Jul	09:30	UK		Bank of England minutes		Jul	9-0		--	--
23-Jul	10:00	Euro area		Government Deficit		Q1			--	--
23-Jul	11:00	UK		CBI Reported Sales		Jul			--	4.0
24-Jul	09:00	Euro area		Manufacturing PMI (P)		Jul	51.7		--	51.8
24-Jul	09:00	Euro area		Services PMI (P)		Jul	52.8		--	52.8
24-Jul	09:00	Euro area		Composite PMI (P)		Jul	52.8		--	52.8
24-Jul	09:30	UK		Retail Sales Ex Auto (mom)		Jun	0.0%		--	-0.5%
24-Jul	09:30	UK		Retail Sales Ex Auto (yoy)		Jun	4.4%		--	4.7%
25-Jul	09:00	Euro area		M3 Money Supply (yoy)		Jun	1.1%		--	1.0%
25-Jul	09:00	Euro area		M3 3-month average		Jun			--	0.9%
25-Jul	09:30	UK		GDP (qoq, A)		Q2	0.8%		--	0.8%
25-Jul	09:30	UK		GDP (yoy, A)		Q2	3.1%		--	3.0%
Source: BofA Merrill Lynch Global Research, Bloomberg, Reuters, Central banks
Table 1: Ratings calendar
Country			Agency		Stance			Expectation
Belgium			S&P		-ve			Stable outlook

Source: Bloomberg, BofA Merrill Lynch Global Research 

 

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